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We find managers with greater ability to efficiently utilize firm resources engage in greater tax avoidance. We define managerial ability as a manager’s capacity to “maximize the efficiency of [firm] resources used for revenue-generating purposes” (Demerjian et al. 2012, p.1) and view cash outflows to the taxing authorities as an inefficient utilization of resources. Moving from the lower to upper quartile of managerial ability is associated with a 3.16 (4.39) % reduction in a firm’s one-year (five-year) cash-based effective tax rate. Cross-sectional tests reveal that higher-ability managers structure investments in R&D, capital expenditures, and foreign operations more tax-efficiently.
Allison Koester, Georgetown University
Terry J Shevlin, University of California-Irvine
Daniel D Wangerin, Michigan State University